A study on firms' investment behavior during financial crisis

Under the backdrop of current global financial crisis, this paper empirically investigate the impacts of financially conservative policy adopted during the pre-crisis period on firms' investment behaviors in crisis. This paper shows that, during the crisis period, (1) financially conservative firms greatly increase their investment expenditures, and financially aggressive firms decrease their investment expenditures substantially, (2) financially conservative firms have greater capacity to raise debt funds, and relatively lower sensitivity of investment to internal funds than financially aggressive firms. (3) financially conservative firms' investment expenditures mainly depend on their growth opportunities. In general, the empirical evidence provided in the paper supports the view that, when hit by adverse shock, firms adopting conservative financial policy before crisis can manage risk more successfully, and raise more needed funds for valuable investment opportunities.